Kiplinger Energy Outlook: High Gas Prices Loom over Midterm Elections
Ongoing disruptions to oil production and refining in the Middle East and Russia keep fuel prices elevated.
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As fighting rages across the oil-rich Middle East, and Ukraine targets Russian refineries with drone strikes, global oil markets remain undersupplied. Oil exports from the Persian Gulf have partially recovered after dropping sharply when the United States and Israel commenced airstrikes on Iran in February. But Iran and its proxies continue to target the oil tankers and pipelines that its neighbors rely on to export their petroleum. Thus, global oil stockpiles continue to decline, keeping prices high. Benchmark West Texas Intermediate crude recently traded at a bit over $100 per barrel, at the high end of its recent trading range. We look for WTI to remain between $90 and $100 per barrel this fall, or even tick higher if the conflict in the Middle East intensifies. That could well happen as Saudi Arabia seeks to take back territory in neighboring Yemen from the Houthi militants who have taken control of Yemen’s coast along the Red Sea, blocking a key oil-shipping route for the Saudis.
Meanwhile, the prices of gasoline, diesel and other refined fuels remain painfully high, due to both the situation in the Middle East and the loss of much of Russia’s refining capacity. Before Ukraine began targeting Russian refineries with drones to fend off Moscow’s ongoing invasion, Russia was the second-largest exporter of diesel fuel. Now, it has banned diesel exports and is even reported to be importing diesel from abroad. That has caused retail diesel prices to soar, saddling truckers and farmers with higher costs for the fuel that keeps trucks and tractors humming.
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Most U.S. drivers put gasoline in their tanks, and there, too, prices are uncomfortably high. The national average price of regular unleaded stands at $4.30 per gallon, more than $1 higher than this time a year ago. Diesel averages an eye-popping $6.32, versus $3.64 one year ago. Those steep increases are a major reason why overall inflation is running at 3.7% right now. If energy costs don’t come down soon, they will start seeping into other prices, reflecting the added expense of making and shipping all sorts of goods.
If there is any good news for consumers on the energy front, it is that natural gas prices remain relatively unchanged from before the Iran war began. America is the world’s top gas producer, and while it exports a huge amount of that gas, there is still plenty left over to satisfy domestic needs. As a result, the U.S. benchmark gas futures contract continues to trade near $3 per million British thermal units. That should keep home heating costs relatively controlled for the many American households that heat their homes with gas. A sustained period of unusually cold weather would spike consumption and push prices higher, but for now, the weather forecast does not show such a pattern. Therefore, we expect gas futures prices to remain near $3 per MMBtu heading into winter.
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